Who Gets Milked to Pay for the Milk Program?

One of the kerfuffles that is adding to the sense of panic in DC is the prospect for a doubling of milk prices if a new farm bill doesn’t pass.

The story is not the most important thing going on, by far, but it does illustrate the bizarro world that is normality, DC style.

Here are the details. In 1949, Congress passed a law that required the government to support the price of milk at 75 to 90 percent of 1914 parity levels. That is, farmers would be guaranteed a price equal to as much as .9 times the price of milk in 1914.

By the early 1980s, it became clear that this price was insanely high given the substantial increases in productivity (driven, for instance, by mechanization and by artificial insemination that improved the quality of the dairy herd.*) There was a very visible sign of how out of line the official price was. The US government accumulated huge inventories of cheese that it bought and stored to prop up the price of milk. By 1981, government cheese could have filled a freight train stretching from the tip of Maine to the Florida Keys.

But rather than let the market determine the price of milk, Congress periodically set new support levels. These levels were above the competitive price, but below the parity price.

Here’s the kicker: the support levels are time-limited, and if Congress doesn’t pass a new support level when the old one expires, the support level reverts to that set by the 1949 bill.

That’s where we are now. Congress hasn’t passed a new farm bill, and the support levels set in the old bill are about to expire.

This problem is easily solved. Pass a farm bill that (a) sets no new price support, and (b) repeal the reversion to the 1949 bill. Then milk prices would go down.

Since prices going up is a bad thing, prices going down should be a good thing, right? Right? It works both ways, right?

But that isn’t even on the table. Instead we get this shrieking about the return to the 1949 law, as if it’s somehow sacrosanct.

It gets better. Agriculture Secretary Tom Vilsack gave a 5 hanky interview with Obama shill Candy Crowley in which he lamented the failure to pass a new farm bill as a sad testament to the powerlessness of rural America.

Seriously?

The persistence of price supports, in milk, and in sugar, and in other ag commodities, is in fact a testament to the disproportionate power of the ag lobbies. These programs transfer billions of dollars from urban and suburban America to farmers. Much of the impact is felt by poor Americans. But don’t worry! We’ll offset that by food stamps-pardon me, SNAP-a program that has metastasized, almost doubling in size in terms of participation, and more than doubling in dollars since Obama took office.

These price supports are an abomination. They are textbook examples of redistributive government policy creating deadweight losses.

For Vilsack to get all weepy about the political weakness of rural America just adds insult to injury.

I knew Ross Perot was an economic idiot when during the 1992 campaign he expressed bewilderment at how the political power of the agriculture interests increased as the farm population declined. Basic political economy provides the answer to that: small, concentrated interests exert disproportionate power The benefits are concentrated, the costs are diffuse. The beneficiaries have a strong incentive to pay pols to advance their program because each individual gets a relatively large amount of money in the bargain, and those who pay the costs don’t have the incentive to organize an opposition because no individual pays a big cost (even though the collective costs are huge). An individual farmer might make several thousand additional dollars. An individual consumer pays a few dollars more. No individual consumer has an incentive to spend to oppose the bill, but individual farmers do. As the farm population has shrunk, it has become more concentrated and homogenous, and much more powerful as a result.

This is not the biggest policy disaster we face now, but it does demonstrate the dysfunction of our politics. And no, it’s not the dysfunction that the Vilsacks and the other DC denizens routinely bewail: the inability to get things done. In fact, getting things done is exactly the problem .

And what gets done is us. Who gets milked to pay for the milk program? You do, sucker.

The apparent “solution” to the so-called Fiscal Cliff supposedly addresses this issue. Oh joy. Just another bolt on that Frankenstein’s neck.

The bill the Senate passed is truly a monstrosity. It is wrong on every dimension. It raises marginal tax rates on some, but doesn’t address any of the wasteful, and completely unjustified, inefficiencies in the tax code. That is, it doesn’t eliminate any of the politically popular but economically inefficient deductions. It raises taxes on capital (dividends and capital gains), which is horrible because capital taxes are highly inefficient. It doesn’t cut spending. It doesn’t address entitlements. At all.

And to add to the seasonal joy, the IRS today announced rules related to Obamastein, AKA the Affordable Care Act. Per the IRS, it won’t be so affordable for families. Although ACA mandates that employers who provide insurance make available reasonably priced policies for employees, it says nothing about family coverage. The IRS rules don’t either. Meaning that a likely outcome is that many employers will offer cheap individual policies, and outrageously expensive family coverage. Thereby driving people to . . . exchanges that many will not be eligible for? Exchanges that might not even exist?

Obama assured us “you’ll be able to keep the coverage you have.” Hahahahahahahaha. Joke’s on you, suckas.

So I wish you a Happy 2013, my fellow bovines. Like all those cows who exist because of the federal government, you are about to spend 2013, and many years to follow, getting screwed then getting milked.

* My dad was president of an AI firm back in the 1970s, Curtiss Breeding Service. It was a subsidiary of GD Searle. The business’s bread and butter was a bull named Paclamar Astronaut, who sired upwards of 40,000 offspring. My parents have a large print of Astronaut in their house. He paid the rent for quite a while. Until Don Rumsfeld became CEO of Searle, and disposed of Curtiss.

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.